Protecting your pension from a 55% tax charge

Protecting your pension from a 55% tax charge

Published: 10 Aug 2016 Updated: 13 Jun 2022

Why protect your lifetime allowance?

The lifetime allowance is the maximum amount you can collect in your pension over your lifetime before you pay 25% or 55% tax on the excess – depending on how you take the money. With lifetime allowance protection it is possible to reduce or completely avoid this tax bill.

Regardless of whether or not your pension is over the £1 million allowance mark, there are two new forms of lifetime allowance protection that you can now apply for. These are Individual Protection 2016 and Fixed Protection 2016.

Individual and Fixed Protection 2016

If you have made pension contributions since 6 April 2016 and have total pension savings in excess of £1 million, you can apply for Individual Protection 2016. This gives you a new lifetime allowance equal to your total pension savings as at 5 April 2016, up to a maximum of £1.25 million.

Those who have not paid into their pension since 6 April can apply for Fixed Protection 2016. Regardless of your total pension savings, this protection lets you keep the previous lifetime allowance of £1.25 million.

People are being caught out when they turn 75

Many people are receiving unexpected lifetime allowance tax bills when they turn 75. This is because your pension savings are tested against the lifetime allowance every time there is a ‘crystallisation event’. These include using part of your pension to take income drawdown or buy an annuity, when you turn 75 or if you die prior to reaching 75.

Those with final salary pensions are at greater risk

People with old final salary pensions can be at greater risk of exceeding the lifetime allowance without realising. The annual income these pensions pay is taken into account when you are tested against the allowance, on top of any other personal, stakeholder or employer defined contribution pensions you have. The rules are complicated but a financial planner can give you more information.

Applying for lifetime allowance protection

Last month HMRC released a new online system, making it easier to apply for lifetime allowance protection. The new system can be accessed here.

If you are unsure which form of lifetime allowance protection is best for you, or how much you have saved in your various pensions, you could benefit from speaking to a financial planner before applying. If a tax bill is unavoidable, a financial planner can also show you how much you may have to pay.

We have a large financial planning team across the UK. You can book a free consultation with one of our financial planners by completing this form, calling 020 7189 2400 or emailing today.


This article was previously published on Tilney prior to the launch of Evelyn Partners.